Summary of this article:
– increased sunshine intensity and duration lead to higher bids and lower discounts in SEOs, researchers from the University of Plymouth found.
– the sunshine effect was more pronounced in uncertain environments, smaller and younger firms, and among less-frequent bidders and retail investors.
A recent study of the University of Plymouth explores the fascinating link between sunshine-induced mood and investors’ bidding behaviour in seasoned equity offerings (SEOs) primary market. The researchers analysed a unique database containing SEO investors’ locations, identities, and bidding information in China. They discovered that increased sunshine intensity and duration led to higher bids and lower discounts in SEOs. The study also revealed that the sunshine effect was more pronounced in uncertain environments, smaller and younger firms, and among less-frequent bidders and retail investors. These findings not only extend the understanding of the sunshine effect in financial markets, but also offer valuable insights into the behavioural determinants of SEO pricing.
Unveiling the Sunshine Effect on Investors’ Bidding Behaviour
Existing research has long suggested that meteorological conditions, especially exposure to sunshine, can affect individuals’ emotional states and decision-making processes. For instance, weather-driven moods have been known to influence a buyer’s car choice, art auction prices, and risk-taking in lotteries. Saunders (1993) was the first to establish a causal link between investment behaviours and weather conditions in the secondary market, finding a significant association between sunshine intensity and the returns of three major US stock market indices.
However, the impact of sunshine-induced mood on investors’ bidding behaviour in the primary market, particularly in SEOs, has remained unexplored. This new study fills that gap by examining the effect of sunshine intensity and duration on investors’ bidding behaviours and subsequent SEO discounts. The researchers found that investors made higher bids when sunshine was intense and of longer duration, translating into lower bid and offer discounts in SEOs. These findings carry significant economic implications, as they demonstrate how a one standard deviation increase in sunshine intensity or duration can lead to substantial declines in bid and offer discounts.
Underlying Mechanisms and Moderating Factors
The study further investigated the mechanisms through which sunshine influences SEO pricing. It was found that the mood misattribution channel and the risk-taking channel were the two underlying conduits of influence for both the intensity and duration of sunlight. The mood misattribution channel suggests that the influence of sunshine is intensified when individuals have to make more complicated decisions or have a lower degree of familiarity with a given context. The risk-taking channel, on the other hand, implies that the influence of sunshine is more pronounced when firms offering SEOs are of higher risk and investors have never subscribed to SEOs before making the current bid.
Implications and Future Research
This study contributes to the literature on the sunshine effect in financial markets by providing valuable insights into how sunshine-induced moods influence investor bidding decisions in the primary market for SEOs. It also highlights the need for primary market investors to be aware of weather conditions’ impact on investment decisions, as they may become more optimistic and inclined to take unjustified risks during sunny periods.
Furthermore, the findings raise important questions for future research, as the growing instability of weather systems worldwide and the established connections between climatic conditions and investors’ behaviours make this an increasingly relevant issue in a financially interdependent world. Understanding this phenomenon and its potential consequences on global trading is crucial for maintaining market stability in the face of climate change, which could have an increasingly destabilising impact on the judgement of investors and market-makers.
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